China Is An Economic Disaster Waiting For Implosion

CNBC Writes: Why China property is immune to tapering

china_real_estate_bubble_debt_collapse

China’s property market is unlikely to take a hit from tighter liquidity when the Federal Reserve finally pursues the much-anticipated tapering of its bond buying program, said Wang Jianlin, chairman of Dalian Wanda, a commercial property-to-karaoke-outlet conglomerate, as well as China’s richest man according to Forbes (Bombay Stock Exchange: 502865-BY) magazine.

“The tight liquidity will push up interest rates. But I don’t think interest rates will go up by too much,” Wang told CNBC in an exclusive interview, adding China’s economy also doesn’t move in lock-step with global markets.

“Because the profit margin for China’s real estate industry is above the global average, a 1 percent to 2 percent rise in interest [rates] will have very limited impact on the profit margins of bigger property players,” added Wang.

China property developers’ gross margins were around 34 percent in the first half of the year, UOB (Singapore Exchange: UOBH-SG) Kay Hian said in a recent report on the developers it covers. It noted the second half is usually stronger.

Wang also expects Beijing to re-focus its sector cooling measures, with property firms to soon be allowed to refinance after a nine-year hiatus on the segment’s IPOs, in a move set to spur further development.

The Shanghai Securities Journal reported last week that detailed regulations on refinancing approval would be released in a couple of weeks at the soonest.

“China’s economy now needs the property industry,” Wang said. “Given the decline in export and investment, China’s economy has turned from high growth to moderate growth with further downside risks.”

Deutsche Bank (XETRA:DBK-DE) also expects Beijing’s drive toward urbanization to offer a long-term fillip to the property sector. The “new form” of urbanization will include developing big city-clusters, rather than just a few big cities, with more urban retail properties in Tier two, three and four cities, it said in a recent report.

“We expect domestic consumption to pick up given higher urbanization and higher productivity,” the investment bank said.

Wang is also bullish on China’s consumption outlook in the longer term. “This will be key for the country’s future economic development,” he said. Wang’s Wanda Dalian conglomerate operates 57 department stores. “By 2015, China is set to become the largest consumer market in the world at over CNY30 trillion ($4.9 trillion).” 

Immune? Sure, just as I am immune from dying.

If you have been to China over the last couple of years you have seen it firsthand.  There is so much real estate development that it is a site to behold. There are literally entire cities coming up all at once in the middle of nowhere.  I was impressed and I am not that easily impressed.

The problem is, most of these developments are driven by speculation and capital misallocation. The majority of these developments are empty, bought by Chinese speculators using multi generational savings and loans.

What surprised me the most is that not a single Chinese person I talked to (and I was mostly talking to very intelligent business/government folk) even remotely worried about this issue. Every single one of them said something to the tune of….”Real estate will always go up in China, if market begins to decline our Government will backstop it to prevent losses. There is no risk, it’s an easy way for us to make money.”

I didn’t want to argue with them to prove my point, but such a statement by itself is a clear indication of a speculative bubble.  Any reliance on the Chinese Government to prevent or stop a collapse from happening is just an illusion at best. Those who study financial markets know that there is no way to prevent or to stop a collapse when it happens. I don’t care what kind of a government it is. Not even GOD can do.

China is a fiscal time bomb that will eventually go off.  I believe that time is coming up very soon. When that happens Chinese property bubble will implode, millions of Chinese families will lose their multi generational savings and that in itself will lead to political instability and a possible revolution.  Simple as that.     

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